The new landscape of fissures

As the European Union lurches from one crisis to another, it is interesting to speculate if an old order—banished after much bloodshed on the continent—is about to stage a return, not only in Europe but the world at large?

After the end of the Cold War, a new order based on free trade, political cooperation at the highest level—manifested in the lockstep decisions at the United Nations Security Council—finally seemed to herald the end of fruitless wars. On the economic plane, another set of institutions, the World Trade Organization and a greatly empowered International Monetary Fund, promised to coordinate capital flows and iron out difficulties to the benefit of all. Seen together, they would have pleased Metternich and Castlereagh, the architects of the Concert of Powers after the Napoleonic wars.

Today, that order is in danger. If it does break down, it would have lasted just 20 years, a mere blip in history.

Consider the sequence of the various crises from 2007. First came the financial crisis. Financial markets froze; investment banks and large financial corporations collapsed. In its wake came the economic crisis, followed quickly by the fiscal crisis. Today, that fiscal crisis is fast translating into a political crisis. The only way to sort out the fiscal mess requires a union-wide fiscal policy, something Germany is resisting. If greater sharing of pain (fiscal union, euro bonds or other arrangements) is not forthcoming and peripheral countries are put through further pain—unemployment, difficulties in accessing money, severe cutbacks in social spending and everything that goes under the rubric of austerity—the temptation to scoot from the union would be too hard to give up. This will surely be followed by competitive devaluation of currencies, leading to all-round chaos. Even before this happens, the mere hint that a country is planning an exit will be enough to fuel a meltdown.

If the euro witnesses a breakdown, the economic consequences for the world will be unpredictable. It will lead to the old problem of economic competition between companies rising all the way upward to competition between nation states—the original source of trouble in inter-war Europe. Devaluation of currencies in a world that is witnessing an effective demand failure is the surest recipe for geopolitical complications.

It is interesting to look at different theatres across the globe to assess potential trouble spots. Two can be discerned clearly. In the Middle East, Iran and Israel. In East Asia, Japan, South Korea and countries in the periphery of the South China Sea. In both regions, the US and China are aligned on the opposite sides.

Where does all this leave the Indian subcontinent? In a fairly difficult place. There are three sources of complications. On the west, Pakistan—a country corroded with religious radicalism, a footloose army and a non-existent economy— wants to resolve an atavistic claim in its favour. To the east and the north, Chinese intentions remain unpredictable even if frictions along the vast—and at many places undemarcated—border are on the rise. A third source of potential trouble is Myanmar. Its tentative steps towards political liberalization are fraught with danger. From the rather subdued competition between China and India, a third—more combustible—participant is ready to enter: the US.

In the case of Pakistan, there is an additional complication. Abandoned by its long-time benefactor, the US, Islamabad now looks at Beijing for succour. The latter may oblige, if only to corner India. The two have hardly any points of congruence required for a sustained friendship at the inter-state level bar one: animosity towards India. That is not all: further east, in the South China Sea, competition between different states is intense and is a potent source of trouble.

The question to ask is: many of these rivalries have existed for long, why have they gained salience now? One explanation, partial at least, is that of the loosening embrace between the US and China. So long as their mutual interests moved in one direction, the causes of friction—for example, Taiwan—remained firmly subdued. If anything, perceptive Americans—aware of the limitations of US primacy—would not have minded handing over the baton to Beijing, after it had been sufficiently coached, in East Asia. The post-Cold War logic of interlocking markets made that a distinct possibility. But before the lesson could be finished, the tectonic changes of 2007 began. Today, China is not an unwilling pupil, but an impatient one.

So, is it time to dust off one’s copy of Lenin’s Imperialism: The Highest Stage of Capitalism and watch “inter-imperialist” rivalries (the US and China?) march the world to disaster? Perhaps. The lesson, however, is not to retreat behind nationalist walls— as many who dream of returning to the welfare state argue. That would be a dangerous course: protectionist walls and inter-state competition are two faces of the same coin. If anything, the present crisis amply demonstrates how the desire of retaining the core ideas of the nation state—fiscal pleasures and financial obduracy—is dangerous. The path to peace and security lies in reinvigorated globalization. Further trade liberalization, empowerment of multilateral economic and financial institutions and a rule-based trading order should be the milestones on that path.